[See bottom of this article for links to other ESG Insight articles on the health care sector. – Ed.]
]]> David S. Brown and Dr. Stephen Tosi, executives of University of Massachusetts Memorial Health Care, began their Globe article by praising Harvard Medical School for recently imposing restrictions on “relationships between its faculty and the pharmaceutical and medical device industries.”They note that a survey of medical school department chairs in the Journal of the American Medical Association “revealed that 60 percent reported some form of personal relationship with industry, including as a consultant, paid speaker, officer, founder, or member of a board.”
After describing lawmakers’ and others’ concerns about such relationships, they describe the UMass system’s vendor relations restrictions, and their apparent success.
In the 1830s, these industries did not exist as we know them today. Nonetheless, financial relationships between doctors and the pharmacists who made up drugs and nostrums were of major concern to medical reformers. The conflict of interest was obvious.
George Eliot made this reform a major theme in Middlemarch (1872), the greatest novel in English on social change, I think.
Her protagonist, Tertius Lydgate, received his medical education on the Continent and returned to England determined to alter medicine,
...for since professional practice chiefly consisted in giving a great many drugs, the public inferred that it might be better off with more drugs still, if they could only be got cheaply, and hence swallowed large cubic measures of physic prescribed by unscrupulous ignorance which had taken no degrees. Considering that statistics had not yet embraced a calculation as to the number of ignorant or canting doctors which absolutely must exist in the teeth of all changes, it seemed to Lydgate that a change in the units was the most direct mode of changing the numbers. He meant to be a unit who would make a certain amount of difference towards that spreading change which would one day tell appreciably upon the averages.... (Chapter 15)
Then in words many social investors could cite, Eliot describes one of Lydgate’s aspirations:
...He intended to begin in his own case some particular reforms which were quite certainly within his reach.... One of these reforms was to ... simply prescribe, without dispensing drugs or taking percentage from druggists. This was an innovation for one who had chosen to adopt the style of general practitioner in a country town, and would be felt as offensive criticism by his professional brethren. But Lydgate ... was wise enough to see that the best security for his practising honestly according to his belief was to get rid of systematic temptations to the contrary. (Chapter 15)
By his own standards – if not others’ – Lydgate fails. Why is one of the tragedies of Eliot’s magnificent novel.
For responsible investors and reformers of all stripes, Eliot illuminates how often the same battles must be fought. The contexts will be different – as different as a country pharmacist in the 1830s is from a multi-national pharmaceutical corporation in the 2010s – but not the nature of the struggles.
Some ESG Insight articles about the health care sector. On conflicts of interest:
It's a Price, Not a Cost: The ‘Market Covenant’ and Health Care Inflation
On the impact of health care reform:
On access to medicine in poorer countries:
]]>In an editorial, the Times noted regulatory action taken since 1990 has led to reduced toxicity in Adirondack lakes and forests, and they have rebounded. It called for further action, preferably legislative, to improve on these gains.
It’s worth recalling what a hot-button issue this was amongst eastern environmentalists 30 to 40 years ago, and drawing lessons from it for today.
]]> Acid rain results from the sulfur dioxide particulates pumped into the atmosphere by power plants burning bituminous Appalachian coal. Merging with water vapor, the SO2 returns to earth as acid rain.Or does it? Is acid rain “natural”? Is there enough hard evidence to regulate? Even if there is, do the benefits of the regulations outweigh their inevitable economic costs? If those questions sound familiar, it’s because they’re the same ones asked by today’s climate skeptics. That’s the first lesson of the acid rain fight. The Times didn’t make that point.
The second lesson the Times’ editorial writers did make: the human will to change can affect seemingly inevitable outcomes. No small number on both sides of the controversy saw trying to fix the problem as hopeless or pointless.
Third, another point the Times didn’t make: the byproducts of mining and burning coal don’t go away. Just because power plants scrub their emissions of some particulates, the wastes don’t go away – as the Tennessee fly-ash flood revealed.
Nonetheless, the Times’ conclusion is, as farmers said in my youth, “right as rain”:
“The lesson of acid rain and the Adirondacks is that good legislation can deflect and even reverse an environmental disaster.”
But do we have the will to try to avert the catastrophe of global warming?
]]>The fuel usage numbers cited to justify the virtue of eating locally are unsupported, concocted, in Budiansky’s view. He concludes:
]]> Budiansky is the proprietor of Liberalcurmudgeon.com (“Who says you have to be a conservative to be pissed off?”), where he amplifies his theme in a post, "Local, Schmocal." There is more about him at the end of this article.Eating locally grown produce is a fine thing in many ways. But it is not an end in itself, nor is it a virtue in itself. The relative pittance of our energy budget that we spend on modern farming is one of the wisest energy investments we can make, when we honestly look at what it returns to our land, our economy, our environment and our well-being.
The Numbers Game
I don’t know whether Budiansky’s case against locavores is right. But his line of argument is, perhaps for reasons with which he might not agree.
The substitution of numeric justifications for nuanced explanations blights more than the local food movement. The environmental movement used carbon and green house gas numbers to represent the challenges it wanted to publicize. Because it is easy to measure and describe, it is easy to address. This reductive approach has crowded out of the mental marketplace issues such as drinking water availability, coal ash pollution and a host of others.
The lesson: Beware of simple – especially numeric – justifications for complex ideas.
The Virtues of Local Economies
For me, the essential virtue of eating locally and its supporting organizations, such as Slow Money, is the creation of local political economies centered on food.
The locavores’ most visible success – and I’d argue by far the most important – are the farmers markets that have sprung up in the past decade from Dorset, VT, to the Ferry Building in San Francisco. I’ve been to tiny ones in Townshend, VT, and vast ones in Madison, WI, and Charleston, SC. I've bought fresh fish from a tiny start up market in Nassau.
Why are farmers markets important? Because they bring together people of widely varying political casts of mind in settings designed to encourage camaraderie, informal conversation, goodwill.
The customers tend to be able to afford the prices, which are considerably higher than, say, Price Chopper’s. So, farmers markets today don’t reproduce the social mix of the markets of my childhood in the late 40s and early 50s. Nonetheless, they are an important step away from “the lonely crowd” of our malls and big box nests.
I Went Back to Ohio
Equally important, eating locally helps keep people on farms, in small communities. Nothing shocked me more on my recent seven-day tour of Ohio than the shells of small towns vibrant 35 years ago. Surrounding them now are strip malls and beyond them huge, consolidated fields.
Like John Steinbeck’s Okies in The Grapes of Wrath, the farmers have been “tractored out.” Today, one man with modern equipment can rake and bale more acres of hay in a day than in the 1950s two men, two boys (I was one of them) and a girl could. Plus, of course, the woman who produced three meals (one brought to the field), kept the house, tended the chickens, etc.
Hence, as I’ve written, Ohio’s “’bare ruined choirs’ of 19th and 20th century life: abandoned factories, vast consolidated corn fields, empty Victorian stores, ghostly streets, downtowns pock-marked by half-empty free parking lots, derelict grain elevators, courthouses entered only through back doors.”
Budiansky and The Covenant of the Wild
Stephen Budiansky wrote The Covenant of the Wild: Why Animals Chose Domestication in 1992. It completely changed my understanding of my/our relationship with domestic animals – especially dogs. At the same time, it offered an ethical basis for our responsibility to domestic animals – something I felt – and feel – very strongly about but for which I lacked a rationale.
From a writer’s standpoint, it’s a daunting book. I wouldn’t change so much as a comma. Budiansky can write in 200 words what others can’t do in 2000. He has a knack for capturing complex research in prose accessible by anyone.
Read The Covenant of the Wild!
Disclosure: I am a founding member of Slow Money.
]]>Proxy access will not be available to investors that seek a change in corporate control. The rule will impose a 25 percent cap on the number of seats that investor candidates may seek. At companies with less than four directors, investors may still seek one seat. The 25 percent limit will be based on the total directors on the board, and thus, a company will not be able to limit shareholder nominees by holding staggered elections. If multiple shareholder groups seek to nominate candidates that exceed the 25 percent cap, priority would be given to the group with the largest economic stake. This provision differed from the draft rule, which would have given priority to the first group to file a notice of intent.
Investors may not borrow stock to meet the 3 percent threshold, but they may use shares on loan to meet that standard as long as they have the right to recall those shares. This provision will help large pension funds that derive significant revenue from share lending. Any short positions would be deducted from the shares that investors must hold to meet the ownership threshold.
Under the new Rule 14a-11, investors would have to hold their shares for at least three years continuously before filing their notice of intent to nominate candidates. Investors also would have to hold their required stakes through the meeting date. The three-year holding requirement was somewhat of a surprise, as many SEC observers expected the adoption of a two-year standard.
The 2009 draft rule had called for a one-year period. Labor funds and CII argued for a two-year standard, while other investors endorsed a one-year requirement. The required three-year period in the final rule should make it more unlikely that a hedge fund or a private equity fund would use proxy access instead of a proxy fight. Many labor investors and public pension funds are indexed investors and tend to hold their shares for a longer term.
The SEC also voted to revise Rule 14a-8 to permit shareholders to file proposals that seek more permissive access standards. Companies also would be allowed to seek investor approval for more permissive rules, but could not opt out of federal access standards. This rule change will apply to all companies without a three-year phase-in period, which means that investors could file access bylaw proposals at small issuers in 2011, SEC officials said.
SEC officials noted that companies and investors would be able to seek different, but not necessarily more permissive, access provisions, such as a one-year holding period and a 5 percent threshold, but investors still would be able to use the federal rule.
The rulemaking process attracted more than 600 comments. Most corporate advocates opposed the rule, while most activist investors supported the concept of access but differed over the details.
The rule, which is contained in a 451-page release, will be effective 60 days after publication in the Federal Register. The rule calls for nominations to be made at least 120 days before the one-year anniversary of the mailing of the company's previous year's proxy statement. Meredith Cross, director of the Corporation Finance Division, explained that the rule, assuming it takes effect on Nov. 1, would allow nominees at companies that mailed their 2010 proxy statements after March 1.
If an issuer believes that an investor has not complied with Rule 14a-11’s various requirements for nominating candidates, the company may file a no-action request with the SEC. Cross said the commission staff will be ready to respond quickly to these requests. Given the many no-action requests filed by companies over the proof of ownership provided by shareholder proponents in recent years, it is likely that access groups will see similar challenges.
Supporters of Rule 14a-11 have downplayed the impact on state corporate laws, noting that the new rule will merely facilitate the ability of investors to exercise their existing rights under state law to nominate board candidates. While state lawmakers can’t impose higher access standards, they could circumvent this rule by taking away the right of investors to nominate directors, SEC officials acknowledged. However, such a radical step presumably would backfire and lead to shareholder demands for companies in that state to reincorporate elsewhere.
Commissioner Kathleen Casey, one of two Republicans on the commission, opposed the rule. “I believe the rule is so fundamentally and fatally flawed that it will have great difficulty surviving judicial scrutiny," she said.
She warned that the rule would enhance the influence of institutional investors at the expense of retail shareholders. She said the SEC had not properly weighed the costs and benefits of the rule, and expressed skepticism that the commission would fully consider the impact on smaller issuers. If the rule survives a court challenge, it would leave the SEC staff with the "unenviable responsibility” of having to rule on various disputes over access, she said.
Republican Commissioner Troy Paredes also opposed the new Rule 14a-11. He said it conflicts with the "enabling approach" of state corporate laws, such as Delaware's, because it has no "opt out" provision, and would not permit state lawmakers to impose higher access thresholds. He said the rule would frustrate shareholder choice by preventing investors from voting to adopt less permissive standards or to permit no access right at all. Paredes said he would have supported amending Rule 14a-8 to permit shareholders to file proposals that seek access provisions.
Democratic Commissioners Elisse Walter and Luis Aguilar both voted for the final proxy access rule. Walter called it "an outstanding example of rulemaking at its best." She said the rule "gives shareholders a genuine alternative to exit." Walter said the commission "was right" not to allow a majority of a company's investors to vote to take away access rights.
Perhaps anticipating a corporate lawsuit, Aguilar noted all the time that the SEC has devoted to this issue over the past decade. “The Commission and its staff have sought to make reasonable judgments to resolve the many competing considerations related to shareholder nominations. These judgments have been informed by the comments received, the staff’s investigation and analysis, and the Commission’s own experience. In addition, careful attention was given to the particular matters that Congress has directed the Commission to consider, including the public interest, investor protection, and the effects on competition, efficiency, and capital formation,” he said.
The final rule likely will spark a legal battle. Earlier this month, the U.S. Chamber of Commerce, which has successfully challenged other SEC rules, said it had retained counsel to review whether to file suit to block access. The Dodd-Frank Act included explicit authorization for the SEC to adopt a proxy access rule, but other legal arguments could be raised by corporate opponents.
“This special interest-driven rule is a giant step backwards for average investors," David Hirschmann, president and CEO of the Chamber’s Center for Capital Markets Competitiveness, said in a press release. "Using the proxy process to give labor union pension funds and others greater leverage to try to ram through their agenda makes no sense. Instead of giving some investors front-of-the-line passes, the SEC should be focused on advancing the interests of all investors, including retail investors. The Chamber will carefully review the rule that was approved today and will continue to fight this flawed approach using every method available."
Some governments believe that access to private communications is a necessary security measure. Critics maintain that Saudi Arabia and the UAE are at least partly motivated by a desire to limit freedom of expression and strengthen their already strict policing of the internet for political content.
This is the latest in a series of “tense standoffs” between governments and private corporations over questions of individual rights and national security, as described by a July 2010 ESG Insight article. Such conflicts include Google’s faceoff with China over questions of internet censorship and Nokia Siemens Networks’ provision of “lawful intercept” capabilities to Iran, which allegedly allowed authorities to monitor and censor internet traffic during the disputed June 2010 elections.
Saudis, Others Want the Same Access as US, Canada
Along with questions about whether Western companies should provide surveillance capabilities to undemocratic regimes, these disputes also highlight a possible double standard. Nations like the US and Canada, home of BlackBerry maker Research in Motion (RIM), are largely understood to have access to personal internet traffic. The US has an advantage in that many encrypted email services such as Gmail and Yahoo have servers on US territory, rendering them subject to court-ordered disclosure.
]]> Earlier this month, RIM flatly refused government access to its data flows, and denied cutting deals with any governments. On August 12 it also posted a set of rules for its cooperation with countries demanding access to data flowing through RIM servers, in which it reiterated its stance on the equal treatment of all countries. And yet, its settlements with India and the Saudi government suggest that some nations may be more equal than others.RIM Can’t Read Its BES Clients’ Email
While both sides are keeping mum, the Saudis seem to have demanded access to both user data as well as a proprietary RIM decryption tool. Experts say it would be technically impossible for RIM to provide this, especially for corporate BlackBerry Enterprise Server (BES) messages.
BlackBerrys can provide three distinct data channels: the proprietary corporate BES service; RIM’s consumer BlackBerry Internet Service (BIS); and BlackBerry Messenger (BBM) communications. BES allows corporations to monitor and archive everything that happens on all company BlackBerrys, which act as a gateway to a company’s email systems. Emails sent on BES are encrypted end-to-end, from sender to recipient, and notoriously difficult to intercept and decrypt—a main differentiator for RIM. (Indeed, the White House uses BlackBerrys for its internal communications.)
The company has insisted that it “does not possess a ‘master key’” that would allow third-party access to BES email exchanges:
The BlackBerry security architecture for enterprise customers is purposefully designed to exclude the capability for RIM or any third party to read encrypted information under any circumstances. RIM would simply be unable to accommodate any request for a copy of a customer’s encryption key since at no time does RIM, or any wireless network operator, ever possess a copy of the key.
Messages sent over BIS, on the other hand, are no more secure than messages on other smartphones. BBM bypasses BES servers completely and relies on RIM servers for transmission. Even if Saudi Arabia and other governments did gain greater access to BBM data without help from RIM, tech experts say messages may still be encrypted, and thus indecipherable.
To sum up, RIM does have the capacity to expose the data flowing via BIS and BBM. But to gain access to messages sent via BES, governments must obtain it from corporate owners of BES servers.
RIM’s Deals with Saudi Arabia, India: Do Bigger Markets get Better Treatment?
RIM's settlements with Saudi Arabia and India show how the firm may accomodate other governments going forward.
Saudi Arabia has some 700,000 BlackBerry users, RIM’s largest market in the Middle East. According to a Saudi Communication and Information Technology Commission (CITC) official, RIM has agreed to install a relay server in Saudi Arabia, effectively allowing authorities to observe messages sent by BIS from and within the country.
India has an estimated one million users, and is already the largest wireless market behind China. RIM has indicated it would abide by India’s end-of-August deadline for access to data sent via BBM, though it has remained secretive as to how it will comply with government requirements. RIM has also helped the government identify corporations using BES, potentially exposing those firms to government pressure.
Bruce Schneier, chief security technology officer at BT, told the Associated Press that RIM’s Saudi arrangement is similar to deals struck in Russia and China. He also warned that every time RIM strikes such a deal, it undermines its claims about its security system’s integrity.
Needles in an Ever-Growing Haystack
Thomas Shambler, the Dubai-based editor of Stuff’s Middle Eastern edition asserts that users in the UAE are more concerned with losing service than with government scrutiny. Bahrain officials have opted not to interfere with smartphone traffic, saying that terrorists will be able to communicate no matter what channels the government tries to control. And governments may simply be fighting a losing battle in trying to read the world’s email. In May 2009, technology market research firm The Radicati Group estimated that in 2009, 247 billion email messages were sent every day—more than 2.8 million a second—by 1.4 billion email users. The sheer volume of online information may already be too much for any government to monitor, adding yet another challenge to sovereignty in an increasingly interconnected world.
]]>The judge noted that the company’s bylaws provide for plurality voting and that the resignation policy gave the board discretion to refuse the resignation. While the pension fund argued that the board’s stated reasons for its decision were inconsistent with the record, the judge did not agree. In his ruling, Noble said accepting Westland’s argument that the board’s decision merits greater scrutiny “could effectively rewrite the [plurality] voting provisions in the company’s bylaws.”
On appeal, the Delaware Supreme Court declined to overturned Noble’s determination that the board had not acted with an entrenchment motive. The court also agreed that Noble was correct not to apply the Blasius standard of review and require the board to present a “compelling justification” for its action to frustrate a shareholder vote. However, in his opinion, Justice Jack Jacobs went onto discuss the “proper purpose” requirement for Section 220 actions, and left the door open for investor lawsuits over director resignations.
Citing a 2007 Chancery Court decision, Pershing Square v. Ceridian, with approval, Jacobs said a proper purpose would include an effort to determine an individual’s suitability to serve as a director.
“The less-than-majority shareholder vote may be viewed as a judgment by the holders of a voting majority that those director-candidates were no longer suitable to serve (or continue to serve) as directors. Correspondingly, the Board’s decision not to accept those resignations may be viewed as a contrary, overriding judgment by the Board,” Jacobs wrote. “Where, as here, the board confers upon itself the power to override an exercised shareholder voting right without prior shareholder approval (as would be required in the case of a shareholder-adopted bylaw or a charter provision), the board should be accountable for its exercise of that unilaterally conferred power.”
While Jacobs said a majority withhold vote could “establish a credible basis to infer that a director is unsuitable” and thus warrant “further inspection,” he cautioned that an investor would still have to meet the Pershing Square decision’s requirement that the Section 220 request must seek information that is necessary to determine suitability, and that access to documents may be limited to protect confidential board communications.
“That, in our view, strikes the appropriate balance between the shareholders’ entitlement to information and the directors’ entitlement to make decisions in the corporation’s best interest free from abusive litigation,” the justice wrote.
In a recent posting on TheCorporationCounsel.net blog, John Grossbauer, an attorney with the law firm of Potter, Anderson & Corroon in Delaware, said the Supreme Court’s decision “provided a roadmap for future plaintiffs who desire to inquire into a board' decision not to accept resignations under a plurality plus system.”
The SEC's meeting notice included no details on the content of the final rule that will be presented for consideration. The final rule may require that investor groups hold a minimum 3 percent stake for at least two years to be eligible to nominate board candidates to appear on management proxy statements, according to SEC observers and news reports.
]]>
Investors also filed a derivative lawsuit over HP's 2006 boardroom spying scandal, during which then-chairman Patty Dunn resigned. As part of a settlement with California's attorney general and investors, the company adopted governance changes and revised its Standards of Business Conduct. In the most recent lawsuit, the Brockton pension fund contends that these measures "went largely unimplemented," while the board allowed Hurd to serve both as chairman and CEO, and "was permitted to run HP as his own private fiefdom -- free from Board oversight."
For 250 years, scholars have argued about which drove the rise of capitalism: religious transformation – the Reformation and its offshoots – or economic change?
]]> The question may seem arcane, maybe specious. Obviously the two worked together. Chicken and egg and all that.... Also, what possible relevance can the question have to today’s imperatives – global warming, a broken global financial system, etc?I would argue that understanding the reality of the change that brought about capitalism is necessary to addressing today’s challenges. Does change come from altering religious/moral beliefs or from reorganizing economic structures and systems? Yes, they go together. But they are separable elements, necessarily separable elements.
I believe the moral precedes and drives the economic. I take that view from Adam Smith’s The Theory of Moral Sentiments (1759). Many others have made the same argument.
This discussion allows me recommend, once again, R.H. Tawney, Religion & the Rise of Capitalism (1925). Like Smith, one can argue Tawney is fatally dated. But no one – Smith included – has written more provocatively, more compellingly, more literately on this great social transformation.
And take a look at Michael Fitzgerald’s interesting interview with Mark Valeri.
]]>The SBA has begun a two-part campaign directed at companies that don't require directors to receive majority support in uncontested elections. Michael McCauley, the SBA's senior officer for investment programs and governance, said the retirement system has begun sending letters to the 508 firms in the Russell 1,000 index that still maintain plurality voting or have plurality voting plus a director resignation policy. Over the next month, the SBA plans to send letters to the 1,700 firms in the Russell 2,000 index that have no majority voting procedures.
"One of the fundamental rights shareowners have under state corporate law is the power to elect corporate directors," McCauley wrote in a letter to the companies. "SBA staff endorses majority voting for the meaningful accountability it affords your shareowners and believes it improves the performance of individual directors. Such accountability serves to enhance shareowner confidence in board actions. Under plurality voting in uncontested elections, the election of directors by less than a majority vote has led shareowners to question the legitimacy of the director selection process."
While 70 percent of S&P 500 index companies now have majority voting provisions, up from 52 percent in 2008, this practice is less common among smaller issuers. Among S&P 1,500 firms, only 35 percent have some form of majority voting procedures, according to ISS data.
Investors have expressed a renewed interest in pushing companies to adopt majority voting bylaws after lawmakers dropped a majority voting mandate from the Dodd-Frank legislation in June.
]]>The FT reporters found “rather typical” explanations for Germans’ lack of interest in environmental, social and governance (ESG) integration. But it should be noted that the ESG community has taken concrete steps towards answering skeptics in Germany, and around the world. These steps include ongoing academic research into the performance impact of ESG integration, and an initiative to develop standardized metrics for comparative evaluation of company performance. MSCI’s ESG team has supported both of these efforts.
]]> “The Least Rewarding Job in Asset Management”From the August 8 FT article by Ulrich Buchholtz and Maik Rodewald:
Selling sustainable investment products to German- speaking institutional investors has been one of the least rewarding jobs in asset management, and it still is.
Ask a top representative of a German pension plan such as Rainer Jakubowski of Germany’s €20bn (£16.5bn, $26.4bn) Berlin-based fund BVV, why it does not invest in a sustainable securities fund, and you will get three rather typical answers.
Firstly, “the market for sustainable funds is too opaque.” Secondly, “despite many research studies, there’s still no convincing evidence for the outperformance of these funds”; and thirdly, “there are no common industry standards about what makes an investment sustainable.” Whereas the first two answers do not appear to be specifically German, the third one could very well be.
The FT reporters, and the studies they present from German consultancy Funds@Work, focus on the third issue – the importance of common standards to the heavily-regulated German financial sector. The need for standards is a concern for German policymakers and investors, and the firms (including MSCI’s ESG team) who serve that market. The second question, about the performance penalty (or reward) of ESG integration, has been an evergreen topic of industry and academic inquiry.
Decades of Research Find SRI Won’t Hurt, May Help Returns
ESG Insight has periodically written about research into the impact of ESG integration on investment returns. Links to some of these stories are found here and also provided at the end of this article. Perhaps of greater interest to mainstream investors will be recent studies by independent financial firms from outside the SRI/ESG space. In 2010, US consulting firm Callan Associates released Responsible Investing – A Primer, and Deutsche Bank published Responsible Investments – A New Investment Trend Here to Stay. [Both reports are available for no cost; the Callan site requires free registration.]
Each study provides a good overview of the issue, and the Callan piece posits an interesting “Theory Behind a Positive Responsible Investment Premium.” This section lists potential drivers of SRI outperformance and asset growth:
First, companies with strong ESG scores minimize the potential for massive future legal liabilities, thus assessing investments by these additional criteria can mitigate portfolio risk.
Second, the more important ESG and SRI issues become to global consumers, the more weight they will have in the purchasing decisions driving firm revenues.
Third, consumers play another role, that of employee. … Positive ESG performance will enable firms to attract, maintain and motivate the best employees, increasing the firm’s competitive advantage.
SD-KPI Project Sets Uniform Performance Metrics
The Deutsche Bank report agrees that broader ESG/SRI integration is hampered by a lack of “uniform standards and definitions assuring an adequate level of product transparency.” As noted by the FT, Dr. Axel Hesse has led a comprehensive program to develop standard metrics for ESG performance: the Sustainable Development – Key Performance Indicators (SD-KPI). Since 2004, Dr. Hesse has consulted with leading ESG investors, managers and research firms (including the MSCI ESG team and two of its antecedents, Innovest and KLD) about the most relevant criteria for judging ESG performance.
The goal of the SD-KPI project is not only to organize the work of investors and managers. Dr. Hesse’s report, SD-KPI Standard 2010-2014, also gives corporations a "minimum reporting standard" for sustainability information in annual reports, according to the German Federal Environment Ministry. With this stamp of approval, German firms may report more ESG data, and more managers can integrate such factors into their analyses.
“Critical Mass”
The Callan report's "Theory" sums up the possible impact of broader ESG integration:
…A good ESG score could be viewed as a positive earnings “quality” signal on the margin, all else being equal. …As it gains critical mass it is conceivable that a price premium would accrue to firms with positive ESG scores. Therefore, skillful early adopters could reap the benefit of buying exposure to that future premium.
For past research on the performance impact of ESG/SRI integration, see the ESG Insight articles below.
Dan DiBartolomeo and Lloyd Kurtz on the KLD400 Social Index: 20 Years of ‘SRI as a Free Good’
ESG 'Active Owners,' Like Norway, Have Better Control of Investment Horizons
'Are Ethical Investments Good?' New Research on Impact of FTSE KLD 400
Social Investment Forum Answers Top Ten Questions about SRI/Sustainable Investing
Passive Strategies for ESG Investing: An Overview from Index Universe
]]>Despite its problems, the California program has helped keep 840 million pounds of monitors and TVs out of landfills, according to McClatchy’s research. Domestic dismantling of e-waste is an important step towards stopping an ugly global trade in discarded electronics. While shiny new gadgets flow from Asia to customers in the US and Europe, old ones are shipped back to developing nations, where poor people perform the toxic task of stripping minerals from the machines.
]]> Consumers, regulators and investors have called for electronics manufacturers and retailers to better manage e-waste, but the most destructive practices tend to be performed by individuals and small firms outside the formal economy. In this context, California’s in-state recycling model may still prove instructive, especially as developing nations begin to generate more of their own e-waste.Electronics Account for 70 Percent of Heavy Metals in US Landfills
Modern electronic devices can contain 60 different elements. When electronics enter the regular waste stream, the metals and chemicals they contain can potentially contaminate the soil and water. The Natural Resources Defense Council has stated that electronic waste accounts for 70 percent of the heavy metals found in municipal landfills, including lead, mercury, arsenic and cadmium, which can potentially seep into ground water.
More Gold in a Ton of Electronics than in a Ton of Ore
Ideally, discarded electronics can be stripped of metals and rare minerals. This can be a profitable trade; one can extract more gold out of a ton of electronics than a ton of gold-bearing rock. In fact, some of the gold in recent Olympic medals came from e-waste.
Unfortunately, this recycling is often done in developing nations, where labor costs are lower and environmental and health regulations less stringent. Even companies that explicitly claim to process e-waste safely and locally have been found to have illegally shipped containers of waste to developing countries.
For example, in July 2009, the US Environmental Protection Agency filed a Complaint and Compliance Order against EarthEcycle, a company handling e-waste disposal for several charities in Pittsburgh, for shipping cathode ray tubes to South Africa and Hong Kong after it had pledged to recycle the waste locally. The company was accused of exporting hazardous waste without authorization and failing to prepare a hazardous waste manifest.
US Government Accountability Office investigators have posed as Hong Kong-based foreign importers looking to buy e-waste; more than forty companies responded with offers, despite the fact that it is illegal to import e-waste into China under Hong Kong law, Chinese law and the Basel Convention.
Picking the Toxic Bones of Burnt Electronics
A 2007 New York Times report described the awful human cost of developing-world e-waste processing. In Guiyu, a city in Guangdong Province, women and children scavenge electronic components for minute amounts of precious metals, breaking apart and burning old computers with little protective gear. The region is said to process 1.5 million pounds of e-waste a year. Here, the recyclers are peasants who recover precious metals by burning old electronic products, and then sorting through the remains. This method releases toxic chemicals, including brominated flame retardants (BFRs) used in circuit boards. Certain BFRs induce neurotoxicity and immunotoxicity, and when electronics are burnt or smelted in open air, BFRs can form additional toxic chemicals.
Greenpeace has filmed some Guiyu workers burning circuit boards and extracting gold with acid—work for which they earn less than ten dollars a day. Drinking water has to be brought into the city, as pollution has ruined the local river. Greenpeace also claims that pregnancies in that area are six times more likely to end in miscarriage. The Basel Action Network (BAN), another NGO active in this space, has stated that people in Guiyu have shown some of the highest levels of cancer-causing pollutants ever documented. According to BAN, seventy percent of children have elevated levels of lead in their blood, and instances of brain damage have been recorded.
More Developing-World Wealth, More E-Waste
Developing nations are also generating more e-waste domestically. In February 2010, the United Nations Environment Programme (UNEP) presented a report to the Conference of the Parties of the Basel Convention and other world chemical authorities.
Using data from 11 developing countries, UNEP’s Recycling - from E-Waste to Resources outlined the expanding threat of e-waste by estimating current and future e-waste generation on a global scale. By 2020, China and South Africa e-waste is expected to increase by 200-400% as compared to 2007 levels; a 500% increase was predicted for India.
Similarly, a 2010 report by the American Chemical Society in Environmental Science & Technology forecasts that the global generation of obsolete personal computers in developing countries will exceed that of developed regions in the coming decade. By 2030, discarded computers from developing regions were predicted to total 400-700 million units, twice that of developed regions at 200-300 million units.
International Efforts to Control E-Waste Trade
Concerns about e-waste have led to a number of responses, from both governments and corporate actors. The 1992 Basel Convention prohibits exports of e-waste to developing countries. The US is the only industrialized country that has not ratified the Basel Convention. (In comparison, the only other countries that are signatories but that have not yet ratified the treaty are Afghanistan and Haiti.)
At the corporate level, multi-stakeholder initiatives like Solving the E-waste Problem (StEP) and the Global e-Sustainability Initiative (GeSI) bring together a constellation of members, including industry actors, to determine sustainable approaches to deal with e-waste. StEP projects include annual status reports and a “best practices” document for e-waste policies.
At the regional level, the 2007 European Community’s Waste Electronic and Electrical Equipment (WEEE) directive targets manufacturers of electronics. European manufacturers are now obligated to take back and recycle their products, or dispose of them in an environmentally-friendly way if they cannot be refurbished or recycled.
The Basel Action Network and the Electronics TakeBack Coalition (ETBC) are pushing for more national legislation prohibiting the export of e-waste to developing countries. BAN has also put together a list of responsible e-waste recyclers called the e-Stewards Initiative.
US Efforts by State and City Governments
In the US, states and cities have grappled with the e-waste crisis. Unlike California, most states do not directly pay for or collect old electronics. New York State now mandates that manufacturers take back their discarded products, effective April 2011. Companies will be required to take back not only their own products, but also those of companies who have gone out of business by 2011. They will also be prohibited from dumping any e-waste in landfills and face recycling quotas and fines in the case of non-compliance. Consumers face the same requirements as of January 2015. New York City passed its own e-waste law in 2008. The bill was supposed to begin collection from manufacturers in 2009 and impose fines for residents starting 2010.
Corporate Initiatives
Most leading electronics manufacturers and retailers have take-back programs for their own products, and some accept any manufacturer’s products. Best Buy recycles appliances, accepts mail-in mobile phone recycling, and accepts all manufacturers’ products. Apple, Epson, Dell, Nokia, HP, IBM and other large ICT companies typically recycle end-of-life products for free or for a small fee, or offer them for reuse. In May 2009, Dell officially banned the export of e-waste to developing countries by its contractors or intermediaries. Wal-Mart assesses its suppliers on the environmental sustainability of their products, including end-of-life solutions and the amount of hazardous substances used, and has announced that its buyers would weigh these elements in their purchasing decisions.
Investors Push for Disclosure and Less Toxic Alternatives
While these efforts are important, California’s struggles with fraud and the persistence of illegal e-waste exporting show that they are incomplete. A lack of transparency in the post-consumer e-waste stream makes it difficult to judge the effectiveness of the various initiatives.
In response, shareholders have called for better disclosure of actual waste management practices. Domini Social Investments has submitted a resolution at Becton, Dickinson & Co, a medical technology company, asking it to report on its use of BFRs and to examine safer alternatives. In 2006, the proposal received 8.7% of votes. In 2008, it obtained 36.1%. Other companies have also had to address shareholder concern over the presence of hazardous substances in their products.
Investors can play an important role in managing the e-waste crisis. The current safety net of state, municipal, international and corporate initiatives has proven porous. By holding electronics companies responsible for results, not just policies and initiatives, shareholders can help mitigate the ugly consequences of the world’s appetite for shiny new gadgets.
]]>The three board members on Massey's ballot in May had more than 42 percent opposition amid a well-publicized "vote no" campaign by the Change to Win labor federation, the California Public Employees' Retirement System (CalPERS), and other public pension funds.
“In the wake of the tragedy, shareholders have been keenly focused on the board’s accountability to its owners, so moves to introduce annual voting for directors and strengthen the board’s oversight of management are vitally important,” said Anne Simpson, CalPERS' senior portfolio manager for corporate governance. “We will be calling for shareholders to approve the reforms at the special meeting in October, and continuing to engage with the board.”
However, the CtW Investment Group, the investment arm of the Change to Win labor federation, was critical of the board's refusal to appoint an independent board chair. "By failing to name an independent chairman, the Massey board has once again demonstrated its unresponsiveness to shareholders and unwillingness to challenge Chairman and CEO Don Blankenship," said Michael Garland, CtW's director of capital strategies. "Without fundamental changes to the board’s leadership and composition, shareholders will continue to bear the cost of Mr. Blankenship’s confrontational and counterproductive approach to shareholders and regulators alike."
"Over the past two months, Massey has sued the Mine Safety and Health Administration; hired the former MSHA chief in the Bush administration to attack the agency’s probe of the Upper Big Branch explosion; and been criticized for 'grandstanding' by a federal judge who said the company’s efforts 'to interfere with the ongoing investigation' were a 'waste time and resources,'” Garland said.
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